Manufacturing Ain't Rosy

Krugman's attempts to lipstick our current pig of an economy are way off mark recently. When he's not advocating for yet another disconnect between CPI and inflation (ie real prices paid by real people for real things), or saying there is no inflation due to no wage growth, he's been trying to paint some rosy picture of manufacturing's rebound in our "recovery". The reality is he's just running cover for his pals at the FED and the DNC.

Krugman bases his ideas on what appears to be one rose-colored chart that he concocted... this one:

The quote that immediately follows it: "The weaker dollar really has made a big difference." 


Wait, what?


Since he doesn't give much backing other than to talk about how he technically derived the data for the chart, I'm a little confused at what Krugman is seeing as "a picture of the recent improvement in the US manufacturing trade position." Is it that tiny uptick at the end of the chart from -2.4 to -2.0? Or is it that huge uptick beginning in Q406? And why is the weaker Dollar getting credit for a big difference? 

The Dollars been getting weak for a long time. 

2002-2005 was a period of severe weakening of the dollar - to the tune of 30% weakening, yet during that time, the manufacturing balances plunged. Since the momentary rise in 2005, the Dollar has weakened by about only 16% and QE2 has been about neutral on the Dollar despite the FED's efforts to debase it away. So what "big difference" are we seeing from a "weaker dollar"? 


That's all really a sideshow, though, to the main thing Krugman is trying to do here. He takes whatever movement he's seeing in that manufacturing balance and makes a case that "America’s industrial heartland is now leading the economic recovery." And " the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm."

Ford Casting Plant - Cleveland Ohio (closed 12/2010)

Ford Motor Plant - Detroit Michigan

General Motors Plant - Muncie Indiana

Some weathering. And how did the US auto industry come out so ahead in this game? Oh right... Government stimulus and bailout. 

Now, Krugman has to be the only person in the world who sees anything positive in the manufacturing sector. Let's check:

Wall Street Journal: US Stocks Pare Gains After Weak Manufacturing Data - May 19
BusinessWeek: Industrial companies down on lower production data - May 17

And now, this from today:

Those worried about a slowdown probably focused Tuesday on a report by the Richmond Federal Reserve showing a decline in manufacturing activity in May. The Richmond Fed index fell to a negative 6 after a reading of 10 in April, as shipments and new orders declined.

"When you combine this report with the Philadelphia Fed and New York Fed manufacturing reports, the odds are stacking up that we’re going to see some softening in the national ISM report that comes out on June 1," Sheldon said.

Softening anyone?

So two final things:

Where did Krugman go wrong and why is he being so blatantly wrong?

The first part takes a little critical thinking. The lower GDP we are experiencing led by lower consumption has meant some fewer imports. It's not that manufacturing is picking up and going great, it's that we just aren't consuming so voraciously now that our homes have become dwellings and not ATM's. So the trade imbalance is not so wildly out of whack. Therefore, the manufacturing balance is less negative than it has been.  Krugman's chart looks less correlated to the Dollar's strength then it does to the economies strength as a whole. This is very basic, but very bad, lying with charts.

The second part (why is he doing this?) is easy. With a double-dip recession on the way (and in spades), Krugman is building his case for more fiscal stimulus and more bailouts. He'll point back to green shoots in manufacturing that came about by Government bailout and spending and weep that the Republicans killed it out of their sheer hatred for unions and "the little guy." We'll hear sighing and mumbling coming from the NY Times pages over how the recovery was just taking hold when it was destroyed by hostage taking congressmen. This also sets the stage to ravage the Dollar. If the weak Dollar has done these great things, what can we get with a weaker Dollar? 

As currencies begin to devalue around the world, I can almost smell the hyperinflation.